Sri Lankan banks still awaiting Yes or No response on DDR

Sri Lanka’s banks are still in the dark on the proposed domestic debt restructuring, saying they need an urgent yes or a ‘no’ to prepare for the future.

“If there is a domestic debt restructure (DDR), we need information on how to reprofile debt or prepare for their adjustment rates and such,” a senior banker said.

The Central Bank and Treasury officials have said that there will be voluntary debt ‘optimisation’ for domestic debt holders which essentially means minimising losses (in the current context) but banks said they are seeking clarity on what is meant by voluntary debt optimisation, and whether there is a non-voluntary element that applies to state banks and pension funds.

The government opting for a DDR will open a can of worms, with economists saying, that the state financing is out of control. The government has raked up Rs.14.7 trillion in total commitments, while the revenue is at a mere Rs.3.2 trillion. This shows a gross financing requirement of Rs.11.5 trillion, which is 35 per cent of the country's GDP. “It is a challenging task for the government to finance the gross financing requirement. The International Monetary Fund wants fiscal consolidation through revenue increases, but it is not realistic in the current context. Fiscal consolidation should be done through cutting government expenses,” a senior economist told the Business Times on Wednesday.

Inland Revenue Department’s recent figures show that its revenue collection in the first quarter 2023 has doubled to Rs.316 billion. However, that target was Rs.500 billion, according to the budget. Economists predict that with such revenue shortfall, the country's economy will further contract.

Analysts say the government needs to bring the large informal sector, into the fold to have better tax revenue collection.

A former senior banker and a chairman of a bank said that there will be a massive calamity if the government decides to go for a DDR. “It will undermine the banks’ strategic structure. The main private banks and the state banks have government securities. Haircuts will impact their profitability and their capital structure. A DDR will force shareholders to pump cash to meet the Basel requirements.”

He also noted that in the case of a DDR, public confidence in the banking sector will dilute.” This will impact the retail economy. The government must understand that the basic principle of a country's economic stability comes from the banking sector.”

A second economist said that the government's taxation policy has reduced disposable income. “When there is less trade due to low disposable income, the volume of transactions reduces. In such a scenario, the tax collection will not be anywhere close to what the government expects,” he said.

A banker agreed, saying that the informal economy is growing due to the taxation policy. He said that cheque clearance through the banking sector has dropped in the recent past. “Most merchants insist customers pay in currency rather than credit or debit cards.”

However, that target was Rs.500 billion, according to the budget. Economists predict that with such revenue shortfall, the country's economy will further contract